1997 (3) TMI 81 - HC - Income Tax

Agricultural Land, Capital Asset, Capital Gains, Cost Of Acquisition, Mistake Apparent From Record, Tea Business

Issues Involved:
1. Classification of tea bushes as part of agricultural land or capital assets.
2. Validity of the Tribunal's finding on the cost of acquisition of trees.
3. Taxability of profit from the sale of timber.
4. Computation of written down value of depreciable assets in tea business.
5. Applicability of section 40A(8) of the Income-tax Act, 1961, to the current account balance of directors, shareholders, and others.

Issue-wise Detailed Analysis:

1. Classification of Tea Bushes:
The Tribunal held that 'tea bushes' should not be considered part of 'agricultural land' but as capital assets of the assessee's tea business. Section 2(14) of the Income-tax Act defines capital assets and excludes agricultural land. However, agricultural land is not explicitly defined in the Act. The Supreme Court in State of Kerala v. Karimtharuvi Tea Estate Ltd. and subsequent judgments by various High Courts have held that trees standing on agricultural land are not agricultural land but capital assets. The court concluded that tea bushes, which are nurtured for obtaining tea leaves and not sold as such, are agricultural capital assets.

2. Cost of Acquisition of Trees:
The Tribunal's finding that the trees did not cost the assessee anything was challenged. The Commissioner of Income-tax (Appeals) noted that there was no indication the appellant had not spent on the growth of the trees. The Tribunal, however, found no material evidence of any expenditure on the growth or acquisition of the trees, which were of spontaneous growth. The Tribunal's decision was based on the absence of any cost of acquisition or improvement, making the sale proceeds non-taxable as capital gains.

3. Taxability of Profit from Sale of Timber:
The Tribunal held that the profit from the sale of timber is neither assessable as capital gains nor as taxable income. According to sections 45 and 48 of the Income-tax Act, capital gains require a cost of acquisition and improvement. The Supreme Court in CIT v. B. C. Srinivasa Setty held that assets with no ascertainable cost of acquisition cannot be taxed as capital gains. The trees in question were of spontaneous growth with no cost of acquisition or improvement, thus their sale proceeds could not be taxed as capital gains.

4. Computation of Written Down Value:
Questions Nos. 4 and 5 in R. A. No. 574/(Cal) of 1990 were answered based on the court's previous decisions in CIT v. Suman Tea and Plywood Industries (P.) Ltd. and CIT v. Kothari Plantations and Industries Ltd. The Tribunal's decision to compute the written down value of depreciable assets used in the tea business by deducting only 40% instead of 100% depreciation was upheld.

5. Applicability of Section 40A(8):
The Tribunal held that section 40A(8) of the Income-tax Act, 1961, would not apply to the current account balance of directors, shareholders, and others of the assessee-company. This was based on the court's previous decision in CIT v. Suman Tea and Plywood Industries (P.) Ltd.

Conclusion:
The High Court upheld the Tribunal's findings on all counts. The tea bushes are classified as capital assets, the trees sold had no ascertainable cost of acquisition, and the profit from the sale of timber is not taxable as capital gains. The computation of written down value and the applicability of section 40A(8) were affirmed based on previous rulings. The court's decisions were transmitted to the Tribunal for implementation.

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